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Mon January 14, 2013
Housecat Beats Investors In Stock Market Challenge
Originally published on Mon January 14, 2013 6:08 pm
The UK Observer ran a contest last year, A bunch of investment managers invested in the best stocks they could find, while a cat named Orlando randomly chose stocks from a list. The cat won.
From the Observer:
While the professionals used their decades of investment knowledge and traditional stock-picking methods, the cat selected stocks by throwing his favourite toy mouse on a grid of numbers allocated to different companies.
The challenge raised the question of whether the professionals, with their decades of knowledge, could outperform novice students of finance — or whether a random selection of stocks chosen by Orlando could perform just as well as experienced investors.
These kind of findings are pretty common (though usually less colorful). The idea is that it's very, very difficult for anyone — from the smallest individual investor to the biggest mutual fund manager — to beat the market average. In the case of this story, they're having a cat stand in for the market, to make the professional stock pickers look more ridiculous.
It's true that some stock pickers do better than average and some do worse. But of course this is what would happen if everybody were picking randomly.
Once you take into account things like management fees and transaction costs, actively managed mutual funds that try to beat the market typically end up doing worse than index funds that passively track the overall stock market.
The ur-text on this idea — definitely worth reading if you want to learn more — is is A Random Walk Down Wall Street.